Association for Public Policy Analysis & Management

The last three decades saw tremendous changes in financing K-12 education in United States. Economic research on changes in education spending focused predominantly on court ordered and legislative school finance reforms with the goal of analyzing changes in spending equity and, more recently, their effect on student performance and later life outcomes. Scholars in public financial management were mainly concerned with the impact of tax and expenditure limitations (TELS) on changes in revenue sources and intergovernmental relationships. Interestingly, to our knowledge, there is no research connecting both streams of scholarly work. Our paper addresses the gap in the literature by theoretically investigating the relationship between school finance reforms and TELS, and empirically evaluating the impact of both policies on spending equity.   

We first develop a theoretical model predicting that education finance reforms increase spending in low wealth districts while TELS decrease spending particularly in high wealth school districts. As a result, overall spending equity increases within a state. We hypothesize that the increase in equity is greater compared to the implementation of either one of the policies separately.    

We then examine our hypotheses empirically estimating models at the state and school district level. We use data from the National Center for Education Statistics and the U.S. Census Bureau and create a panel data sets for all available school districts from 1990 to 2012. We use Jackson et al. 2014 as the source of data for the education reform policies and the Lincoln Institute of Land Policy as the source of data on TELS that apply to school districts.

Our state-level-models use different equity measures such as the Gini Coefficient and Theil index as the dependent variables. We estimate a fully saturated model interacting both policies. All state-level-models include state fixed effects to capture time invariant state characteristics and year fixed effects to capture the influence of aggregate time effects. Further, we include control variables capturing trends in demographic and socio-economic factors for each state. We find that education reforms and TELS increase equity. Furthermore, as theoretically predicted, we find that states implementing both policies see a greater increase in equity.

Our district-level-models use different measures of per pupil expenditure as dependent variables. In these models, we use district and year fixed effects and controls for demographic and socio-economic factors at the district level. As theoretically predicted, we find that TELS decrease spending in school districts while school finance reforms increase spending.

We conclude that joint implementation of school finance reforms and TELS is more equalizing education spending compared to the implementation of one policy alone. The effect is greater because TELS constrain wealthy school districts in their spending while education reforms lead to an increase in spending for low wealth school districts. Finally, we argue that failing to account for the relationship between education finance reforms and TELS can introduce bias to models investigating funding equity and adequacy in education.